The Fiduciary Blog

The Fees Paid by Nearly All 401(k) Plan Participants are Excessive

An industry wide study recently completed by the Investment Fiduciary Leadership Council ("IFLC") reveals that participants in most 401(k) plans are being socked with charges that exceed the value of the services they receive.  The findings confirm that
401(k) plan sponsors, and their employees who serve as fiduciaries on their plans, will not pass the Department of Labor's "fee reasonableness" audit.  This spells big trouble for primary plan fiduciaries.

401(k) Fiduciaries Ponder Reasonableness of Fees

The plan sponsor Task Force on ERISA Fees Disclosure and Conflicts of Interest has identified several steps that a fiduciary of a 401(k) plan should take in order to prepare for the Department of Labor's Regulation 408(b)(2).  The Investment Fiduciary Leadership Council ("IFLC") started the task force in September 2008.  Its purpose is to develop for companies that sponsor ERISA qualified benefit plans a process standard for testing the reasonableness of service providers' fees and controlling conflicts of interest.

Plan sponsors have a sincere desire to know what their employees pay for their 401(k) program.  Yet finding out if the costs are reasonable is not so easy. 

At a recent meeting of Task Force members, Roland|Criss unveiled a five step program for plan sponsors that mirrors the supply chain management process found in ISO standards.  The draft of the program contains details on how to conclude if 401(k) plan fees are reasonable.  It also proposes a method to evaluate the conflicts of interest disclosures required in the new regulation.  The Task Force is evaluating the Roland|Criss draft and will likely refine it for adoption and release to fiduciary organizations.

Restoring Trust: the Demand for a Standard of Excellence

In unstable economic conditions, buyers of products and services have a tendency to revamp how they test providers’ quality assurances and costs.  When buyers have been burned or let down, they retrench, protect, and learn from their mistakes.

In the investment industry, buyers are investors and these investors come in different forms.  Investors are; you and me, the public; large and small corporations that sponsor retirement plans for their employees; and public pension funds that control billions of dollars of retirement benefits for city, state, and federal government workers.

The events of the stock market collapse in the fall of 2008 remind investors that their money is not guaranteed.  The double whammy of a credit crisis has revealed that “institutions” – household names in the financial industry – are vulnerable to widespread failure to the point of bankruptcy, takeover, and dissolution. 

The combination of these historic events in the retirement plan industry has created mistrust and deep seeded skepticism among plan sponsors.  Their mistrust is directed towards money managers, recordkeepers, and investment advisors.

 

Here is a case in point.  In response to a service provider that recently announced its merger plans, a plan sponsor client with more than $50 million in participant assets noted, “With this announcement, our committee is having a hard time trusting their advice and guidance.  Of course, the next question must be: on what basis did we trust their advice and guidance when we hired them.”

The issue of provider trustworthiness, credibility, and competence is a wide scale test that is flowing down stream.  As corporate executives and trustees of pension systems field more participant inquiries, complaints, and class action lawsuits, the service provider community has to respond in ways they have not needed to in the past.

Some pundits in the industry improperly suggest that service providers must be more creative in their marketing to be noticed.  Amazingly, they even propose that providers need to be better now because times are tough and people are watching.

The reality is that if in the “good” times a service provider wasn’t pursuing excellence throughout the organization, committed to fee transparency, disciplined in investment philosophy, and tireless in client servicing, it’s unlikely they will rise to these standards in the tough times.  Unless service providers recognize that adopting a standard of excellence and a culture of transparency is the right thing to do and that failure to do so will compromise revenue and corporate value, many energetic sales organizations will experience client defections and reduction in market share.

Investors (buyers) aren’t seeking empty warranties; they are seeking service providers that are committed to a standard of excellence that provides credibility to its claims.  Investors have been reminded that they are no guarantees in the stock market.  Now they want to know who is going to help them and why they should be trusted.

Fortunately for the investment industry a movement began three years ago among investment advisors, investment managers, and recordkeepers to adopt a standard of excellence and get certified against it..  Likewise, corporate retirement plans, public pensions, and foundations seeking to prove the effectiveness of their governance and monitoring system should get prepared and certified to the highest fiduciary standard.

For an online demonstration and further discussion of Roland|Criss’s certification services, contact us at 800-440-3457 ext. 16.  For more information on the organization of certified fiduciaries and recordkeepers, please click here. 

Fiduciary Adviser Audit Specifications Released

Investment consultants, who intend to advise retirement plan particpants under the Pension Protection Act of 2006, will be able to obtain from CEFEX a "Fiduciary Adviser" certification.  The certification will attest to a consultant's conformity to the practices required by the PPA.  Click here and request a copy of the practices.

What is Your Fiduciary Identity?

It seems these days that nearly every investment advisor who serves retirement plans uses the phrases "fiduciary solution" or "fiduciary support" in their sales literature.  With plan sponsor lawsuits against service providers rising, many advisors are evaluating the prudence of assuming too strong a fiduciary posture.

The trouble is that many advisors are not really sure of the boundaries that define their fiduciary risk.  But with plan sponsors hiring advisors based on fiduciary issues, it is hard for advisors to back off.  So what should advisors do?

First determine if your firm's services are actually intended to help retirement plan sponsors satisfy their fiduciary duty.  If not, do not make statements that imply or declare that your firm does so.

Second stop delivering documents to plan sponsors that give them the impression that you are helping them meet their fiduciary duty.  There is an important legal difference between your getting involved in fiduciary governance functions versus only delivering investment reports.  The more an advisor performs governance functions, the greater their liability becomes.  The really wasteful part of spending energy on plan governance functions is that various laws lay all of the accountability for them on plan sponsors.  This is true regardless of how much help they might receive from an advisor.  So why chance it.  Steer clear of plan governance functions.  It would also be good to be sure that you know what defines a fiduciary governance function.

Third, conduct a self assessment of your firm's practices.  Are they anti-fiduciary?  Evaluate your firm's practices against the fiduciary standard to which your clients are responsible.  (Click here to obtain a copy.)  Does your firm support conformity to the standard?

Fourth, if you promote your firm as a "co-fiduciary", be certain that you disclose the limits of its role.  In growing numbers, retirement plan sponsors are learning that some investment providers who emphasize their status as a co-fiduciary employ a misleading claim.  The era is passing quickly for advisors who obtain assets under management on the strength of a claim that they relieve plan sponsors of all of their fiduciary liability.  In fact, the plaintiff bar is actively pursuing advisors who make such claims when sponsors are sued by plan participants' class action lawsuits.  The co-fiduciary tactic is both dangerous for advisors and diminishes your chance of winning new business.

The emergence of a fresh round of investment management industry scandals and lawsuits is making plan sponsors wonder who they can trust.  Calming their fear is a key to a successful advisor marketing and client retention program.  But how do you calm decision makers' fears and prove your trustworthiness?

An increasing number of investment advisory firms are seeking certification from CEFEX under the Global Fiduciary Standard of Excellence.  There is mounting evidence that a CEFEX certification is a powerful way to impart a fiduciary seal of approval on a firm's services.

For example, InterServ, LLC, a CEFEX certified advisor, recently won a $28 million retirement plan client mostly due to its investment committee's members' worries about their fiduciary risk.  InterServ unseated a 16 year incumbent advisor who had nothing more to attest to its competency in supporting its clients' fiduciary duty than the old co-fiduciary claim.

The most important action for advisors to take might very well be emerging in the form of CEFEX certification.  Since its rollout in mid 2006, centers of influence within the retirement plan community are evaluating the way that CEFEX conducts its certification audits.  One nonprofit group, called the Fiduciary Roundtable, issued a circular to its members in January 2007 calling for them to engage only CEFEX certified investment advisors and investment managers.

If you have not looked into CEFEX yet, you should check into it before its momentum catches you off guard.  (Click here and request information about CEFEX's certification program for Investment Advisors.)